Download Classic Theories of Economic Growth and Development

Classic Theories of
Economic Growth and
Development
AEB 4906
Development
p
Economics
http://danielsolis.webs.com/aeb4906.htm
Introduction
Theorists of the 1950s and earlyy 1960s viewed the
process of development as a series of successive
stages of economic growth through which all countries
must pass
pass.
It was primarily an economic theory of development in
which the right quantity and mixture of saving
saving,
investment, and foreign aid were all that was necessary
to enable developing nations to proceed along an
economic
i growth
th path
th th
thatt hi
historically
t i ll h
had
db
been
followed by the more developed countries.
Development
D
l
t th
thus b
became synonymous with
ith rapid,
id
aggregate economic growth.
Introduction
„ The post–World War II literature on economic
development has been dominated by 4 major
and
d sometimes
ti
competing
ti strands
t d off thought:
th
ht
(1) the linear
linear-stages-of-growth
stages of growth model
model,
(2) theories and patterns of structural change,
(3) th
the iinternational-dependence
t
ti
ld
d
revolution,
l ti
and
d
(4) the neoclassical, free-market counterrevolution.
The linear-stages-of-growth
linear stages of growth model
„ This school of thought focused on the lack of
domestic savings and investment. In order to
promote growth, policymakers had to induce
higher savings and investment rates in
developing countries, a proposition that was
easier
i said
id th
than d
done.
„ Rostow’s Stages of Growth
„ Harrod
H
dD
Domar G
Growth
h Model
M d l
Rostow’ss Stages of Growth
Rostow
The model postulates that economic modernization occurs
in five basic stages, of varying length:
„ Traditional society:
„ Preconditions for take-off:
„ Take-off:
Take off:
„ Drive to maturity:
„ Age of High mass consumption:
Rostow’ss Stages of Growth
Rostow
„ Traditional society: understanding and use of technology
technology.
„ Preconditions for take-off: education, capital mobilization,
establishment of banks and currency, entrepreneurial and
manufacturing develops.
„ Take-off: occurs when sector led growth becomes common and
society is driven more by economic processes than traditions
„ Drive to maturity: refers to the need for the economy itself to
diversify
„ Age of High mass consumption: refers to the period of
contemporary comfort afforded many western nations,
wherein consumers concentrate on durable goods, and hardly
remember the subsistence concerns of previous stages .
Harrod Domar Growth Model
„ GDP growth is proportional to the share of
investment spending in GDP.
„ That is: the growth rate of GDP depends
upon
p the level of savings
g and the capital
p
output ratio
Criticisms of the Linear-Stages
Model
„ These
Th
theories
th i have
h
been
b
criticized
iti i d ffor nott
recognizing that, while necessary, capital
accumulation is not a sufficient condition for
development.
„ That is to say that this early and simplistic
theory failed to account for political, social
and institutional obstacles to development.
p
Structural-change
Structural
change theory
„ Structural-change
g theory
y deals with p
policies focused
on changing the economic structures of developing
countries from being composed primarily of
subsistence agricultural practices to being a “more
more
modern, more urbanized, and more industrially
diverse manufacturing and service economy”.
„ There are two major forms of structural-change
theory:
„
„
W. Lewis
W
Lewis’ two-sector
two sector surplus model
model.
Hollis Chenery’s patterns of development
approach.
approach
Structural-change
Structural
change theory
„ The two-sector surplus
p
model,, which views agrarian
g
societies as consisting of large amounts of surplus
labor which can be utilized to spur the development
of an urbanized industrial sector
sector, and
„ The patterns of development approach, which is the
empirical analysis of the “sequential process through
which the economic, industrial and institutional
structure of an underdeveloped economy is
transformed over time to permit new industries to
replace traditional agriculture as the engine of
economic growth
Criticisms of the Structuralchange theory
„ These models have faced criticism for their emphasis
p
on urban development at the expense of rural
development which can lead to a substantial rise in
inequality between internal regions of a country
country.
„ The two-sector surplus model, has been further
criticized for its underlying assumption that
predominantly agrarian societies suffer from a
surplus of labor. Actual empirical studies have shown
that such labor surpluses are only seasonal and
drawing such labor to urban areas can result in a
collapse of the agricultural sector.
„ The patterns of development approach has been
criticized for lacking a theoretical framework
International dependence theory
„ International dependence theories gained
prominence in the 1970s as a reaction to the
failure of earlier theories to lead to
widespread successes in international
development.
„ Unlike earlier theories, international
dependence theories have their origins in
developing countries and view obstacles to
development as being primarily external in
nature rather than internal
nature,
internal.
International dependence theory
„ These theories view developing countries as
being economically and politically dependent
on more powerful, developed countries which
have an interest in maintaining their dominant
position.
„ There are three different, major formulations
of international dependence theory;
„
„
„
neocolonial
l i ld
dependence
d
th
theory,
the false-paradigm model and
th dualistic-dependence
the
d li ti d
d
model.
d l
Neoclassical theory
„ Neoclassical theories represent a radical shift
away from International Dependence
Theories.
„ Neoclassical theories argue that governments
should not intervene in the economy.
„
these theories are claiming that an
unobstructed free market is the best means of
inducing rapid and successful development
Neoclassical theory
„ Competitive free markets unrestrained by
excessive government regulation are seen as
being able to naturally ensure that the
allocation of resources occurs with the
greatest efficiency possible and the economic
growth
th iis raised
i d and
d stabilized.
t bili d
„ Three alternative approaches:
„
„
„
ffree market
k t approach,
h
public-choice theory, and
market-friendly
k t f i dl approach
h
Neoclassical theory
„ the free
free-market
market approach and public
public-choice
choice
theory contend that the market should be
totally free, meaning that any intervention by
the government is necessarily bad.
„ The market-friendly approach advocates
free markets but recognizes that there are
many imperfections in the markets of many
developing nations and thus argues that
some government intervention is an effective
means of fixing such imperfections